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GRACO INC - Quarter Report: 2015 June (Form 10-Q)

10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For the quarterly period ended June 26, 2015

Commission File Number:  001-09249

 

GRACO INC.

    (Exact name of registrant as specified in its charter)     

 

Minnesota 41-0285640
  (State of incorporation)        (I.R.S. Employer Identification Number)     

 

88 - 11th Avenue N.E.

Minneapolis, Minnesota

55413
    (Address of principal executive offices)          (Zip Code)     

                                 (612) 623-6000                                  

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes        X                 No                  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes        X                 No                  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer X   Accelerated Filer                     
Non-accelerated Filer   Smaller reporting company                     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

      Yes                             No          X    

57,729,000 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding as of July 15, 2015.


Table of Contents

INDEX

 

      Page Number

PART I

FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings   3
Consolidated Statements of Comprehensive Income   3
Consolidated Balance Sheets   4
Consolidated Statements of Cash Flows   5
Notes to Consolidated Financial Statements   6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24

Item 4.

 

 

Controls and Procedures

 

 

24

 

 

PART II

OTHER INFORMATION
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 27

SIGNATURES

EXHIBITS

 

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Table of Contents

PART I     Item 1.

GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited) (In thousands except per share amounts)

 

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net Sales

 $ 335,489     $ 322,549     $ 641,942     $ 612,511   

Cost of products sold

  154,866      145,699      299,190      276,349   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

  180,623      176,850      342,752      336,162   

Product development

  14,907      13,405      30,197      26,564   

Selling, marketing and distribution

  50,126      49,503      101,550      95,845   

General and administrative

  31,699      28,094      61,883      53,200   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating Earnings

  83,891      85,848      149,122      160,553   

Interest expense

  4,125      4,676      9,428      9,264   

Held separate investment (income), net

      (158,833)          (10,562)          (188,356)          (14,237)   

Other expense (income), net

  (438)      (202)      272      45   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Before Income Taxes

  239,037      91,936      327,778      165,481   

Income taxes

  66,400      25,700      86,300      48,500   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings

 $ 172,637     $ 66,236     $ 241,478     $ 116,981   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share

Basic net earnings

 $ 2.96     $ 1.10     $ 4.12     $ 1.93   

Diluted net earnings

 $ 2.90     $ 1.07     $ 4.02     $ 1.88   

Cash dividends declared

 $ 0.30     $ 0.28     $ 0.60     $ 0.55   

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (In thousands)

 

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net Earnings

 $ 172,637     $ 66,236     $ 241,478     $ 116,981   

Other comprehensive income (loss)

Cumulative translation adjustment

  12,404      (1,908)      9,393      (1,994)   

Pension and postretirement medical liability adjustment

  1,919      1,225      4,357      2,413   

Income taxes

Pension and postretirement medical liability adjustment

  (739)      (436)      (1,641)      (864)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

  13,584      (1,119)      12,109      (445)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

 $     186,221     $     65,117     $     253,587     $     116,536   
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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GRACO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

          June 26,      
2015
         Dec 26,      
2014
 

ASSETS

Current Assets

Cash and cash equivalents

 $ 44,258     $ 23,656   

Accounts receivable, less allowances of $9,300 and $8,100

  262,722      214,944   

Inventories

  194,568      159,797   

Deferred income taxes

  21,317      19,969   

Investment in businesses held separate

      421,767   

Other current assets

  12,277      19,374   
 

 

 

   

 

 

 

Total current assets

  535,142      859,507   

Property, Plant and Equipment

Cost

  447,367      433,751   

Accumulated depreciation

  (275,968)      (272,521)   
 

 

 

   

 

 

 

Property, plant and equipment, net

  171,399      161,230   

Goodwill

  403,529      292,574   

Other Intangible Assets, net

  244,234      176,278   

Deferred Income Taxes

  38,357      28,982   

Other Assets

  26,247      26,207   
 

 

 

   

 

 

 

Total Assets

 $      1,418,908     $      1,544,778   
 

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Notes payable to banks

 $ 10,354     $ 5,016   

Trade accounts payable

  45,145      39,306   

Salaries and incentives

  38,589      40,775   

Dividends payable

  17,400      17,790   

Other current liabilities

  122,284      71,593   
 

 

 

   

 

 

 

Total current liabilities

  233,772      174,480   

Long-term Debt

  300,410      615,000   

Retirement Benefits and Deferred Compensation

  138,042      136,812   

Deferred Income Taxes

  22,854      22,454   

Other non-current liabilities

  11,475       

Shareholders’ Equity

Common stock

  57,817      59,199   

Additional paid-in-capital

  399,499      384,704   

Retained earnings

  343,666      252,865   

Accumulated other comprehensive income (loss)

  (88,627)      (100,736)   
 

 

 

   

 

 

 

Total shareholders’ equity

  712,355      596,032   
 

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

 $ 1,418,908     $ 1,544,778   
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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GRACO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

       Twenty-six Weeks Ended       
  June 26,
2015
  June 27,
2014
 

Cash Flows From Operating Activities

Net Earnings

 $ 241,478     $ 116,981   

Adjustments to reconcile net earnings to net cash provided by operating activities

Depreciation and amortization

  21,969      18,327   

Deferred income taxes

  (11,324)      (5,710)   

Share-based compensation

  10,990      9,818   

Excess tax benefit related to share-based payment arrangements

  (700)      (2,300)   

(Gain) loss on sale of business

  (147,261)       

Change in

Accounts receivable

  (33,934)      (42,019)   

Inventories

  (24,540)      (9,806)   

Trade accounts payable

  7,879      6,219   

Salaries and incentives

  (8,230)      (9,670)   

Retirement benefits and deferred compensation

  6,094      2,749   

Other accrued liabilities

  56,035      3,916   

Other

  (21,792)      (4,476)   
 

 

 

   

 

 

 

Net cash provided by operating activities

  96,664      84,029   
 

 

 

   

 

 

 

Cash Flows From Investing Activities

Property, plant and equipment additions

  (19,886)      (17,062)   

Acquisition of businesses, net of cash acquired

  (187,853)      (65,219)   

Proceeds from sale of assets

  589,808       

Investment in businesses held separate

      530   

Other

  (250)      (599)   
 

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  381,819      (82,350)   
 

 

 

   

 

 

 

Cash Flows From Financing Activities

Borrowings (payments) on short-term lines of credit, net

  5,336      2,659   

Borrowings on long-term line of credit

  458,540      325,665   

Payments on long-term line of credit

  (773,130)          (211,275)   

Payments of debt issuance costs

      (890)   

Excess tax benefit related to share-based payment arrangements

  700      2,300   

Common stock issued

  14,511      17,792   

Common stock repurchased

  (130,635)      (93,820)   

Cash dividends paid

  (35,339)      (33,485)   
 

 

 

   

 

 

 

Net cash provided by (used in) financing activities

      (460,017)      8,946   
 

 

 

   

 

 

 

Effect of exchange rate changes on cash

  2,136      (813)   
 

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  20,602      9,812   

Cash and cash equivalents

Beginning of year

  23,656      19,756   
 

 

 

   

 

 

 

End of period

 $ 44,258     $ 29,568   
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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GRACO INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the “Company”) as of June 26, 2015 and the related statements of earnings for the thirteen and twenty-six weeks ended June 26, 2015 and June 27, 2014, and cash flows for the twenty-six weeks ended June 26, 2015 and June 27, 2014 have been prepared by the Company and have not been audited.

In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 26, 2015, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2014 Annual Report on Form 10-K.

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.

 

2. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net earnings available to common shareholders

 $     172,637      $     66,236      $     241,478      $     116,981    

Weighted average shares outstanding for basic earnings per share

  58,235       60,453       58,608       60,637    

Dilutive effect of stock options computed using the treasury stock method and the average market price

  1,387       1,575       1,436       1,596    

Weighted average shares outstanding for diluted earnings per share

  59,622       62,028       60,044       62,233    

Basic earnings per share

 $ 2.96      $ 1.10      $ 4.12      $ 1.93    

Diluted earnings per share

 $ 2.90      $ 1.07      $ 4.02      $ 1.88    

 

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Stock options to purchase 1,357,000 and 876,000 shares were not included in the June 26, 2015 and June 27, 2014 computations of diluted earnings per share, respectively, because they would have been anti-dilutive.

 

3. Options on common shares granted and outstanding, as well as the weighted average exercise price, are shown below (in thousands, except exercise prices):

 

  Option
    Shares    
    Weighted  
Average
Exercise
Price
  Options
Exercisable
    Weighted  
Average
Exercise
Price
 

Outstanding, December 26, 2014

  4,975    $ 44.72      3,318    $ 34.86   

Granted

  537      74.23   

Exercised

  (109)      34.55   

Canceled

  (11)      71.93   
 

 

 

       

Outstanding, June 26, 2015

        5,392    $ 47.81      3,726    $ 37.92   
 

 

 

       

The Company recognized year-to-date share-based compensation of $11.0 million in 2015 and $9.8 million in 2014. As of June 26, 2015, there was $17.2 million of unrecognized compensation cost related to unvested options, expected to be recognized over a weighted average period of 1.8 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:

 

      Twenty-six Weeks Ended        
  June 26,
2015
  June 27,
2014
 

Expected life in years

  6.5          6.5       

Interest rate

  1.7 %       2.0 %    

Volatility

  35.1 %       36.1 %    

Dividend yield

  1.6 %       1.5 %    

Weighted average fair value per share

 $       23.22         $       24.83       

Under the Company’s Employee Stock Purchase Plan, the Company issued 166,000 shares in 2015 and 193,000 shares in 2014. The fair value of the employees’ purchase rights under this Plan was estimated on the date of grant. The benefit of the 15 percent discount from the lesser of the fair market value per common share on the first day and the last day of the plan year was added to the fair value of the employees’ purchase rights determined using the Black-Scholes option-pricing model with the following assumptions and results:

 

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      Twenty-six Weeks Ended        
  June 26,
2015
  June 27,
2014
 

Expected life in years

  1.0          1.0       

Interest rate

  0.2 %       0.1 %    

Volatility

  18.9 %       21.4 %    

Dividend yield

  1.6 %       1.4 %    

Weighted average fair value per share

$ 16.51        $ 17.81       

In April 2015, shareholders of the Company approved the Graco Inc. 2015 Stock Incentive Plan. The plan provides for issuance of up to 3.5 million shares of Graco common stock.

Shares authorized for issuance under stock option and purchase plans are shown below (in thousands):

 

    Total Shares  
Authorized
    Available for Future  
Issuance as of
June 26, 2015
   

Stock Incentive Plan (2015)

  3,500      3,460   

Employee Stock Purchase Plan (2006)

  7,000      4,928   
  

 

 

    

 

 

    

Total

  10,500      8,388   
  

 

 

    

 

 

    

Amounts available for future issuance exclude outstanding options. Options outstanding as of June 26, 2015 include options granted under three plans that were replaced by subsequent plans. No shares are available for future grants under those plans.

 

4. The components of net periodic benefit cost for retirement benefit plans were as follows (in thousands):

 

        Thirteen Weeks Ended             Twenty-six Weeks Ended      
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Pension Benefits

Service cost

$ 1,907    $ 1,697    $ 4,003    $ 3,439   

Interest cost

  3,605      3,940      7,380      8,076   

Expected return on assets

  (4,659)      (5,211)      (9,576)      (10,630)   

Amortization and other

  2,426      1,355      4,779      2,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

$ 3,279    $ 1,781    $ 6,586    $ 3,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Postretirement Medical

Service cost

$ 150    $ 125    $ 300    $ 250   

Interest cost

  227      278      453      555   

Amortization

  (101)      (126)      (202)      (254)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

$ 276    $ 277    $ 551    $ 551   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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5. Changes in components of accumulated other comprehensive income (loss), net of tax were (in thousands):

 

  Pension
and Post-
    retirement    
Medical
    Cumulative  
Translation
Adjustment
          Total          
Thirteen Weeks Ended            

June 27, 2014

           

Beginning balance

$ (49,372)    $ 3,697    $ (45,675)   

Other comprehensive income before reclassifications

      (1,908)      (1,908)   

Amounts reclassified from accumulated other comprehensive income

  789          789   
 

 

 

    

 

 

    

 

 

 

Ending balance

$ (48,583)    $ 1,789    $ (46,794)   
 

 

 

    

 

 

    

 

 

 
Thirteen Weeks Ended            

June 26, 2015

           

Beginning balance

$ (75,048)    $ (27,163)    $ (102,211)   

Other comprehensive income before reclassifications

      12,404      12,404   

Amounts reclassified from accumulated other comprehensive income

  1,180          1,180   
 

 

 

    

 

 

    

 

 

 

Ending balance

$ (73,868)    $ (14,759)    $ (88,627)   
 

 

 

    

 

 

    

 

 

 
Twenty-six Weeks Ended            

June 27, 2014

           

Beginning balance

$ (50,132)    $ 3,783    $ (46,349)   

Other comprehensive income before reclassifications

      (1,994)      (1,994)   

Amounts reclassified from accumulated other comprehensive income

  1,549          1,549   
 

 

 

    

 

 

    

 

 

 

Ending balance

$ (48,583)    $ 1,789    $ (46,794)   
 

 

 

    

 

 

    

 

 

 
Twenty-six Weeks Ended            

June 26, 2015

           

Beginning balance

$ (76,584)    $ (24,152)    $ (100,736)   

Other comprehensive income before reclassifications

      9,393      9,393   

Amounts reclassified from accumulated other comprehensive income

  2,716          2,716   
 

 

 

    

 

 

    

 

 

 

Ending balance

$ (73,868)    $ (14,759)    $ (88,627)   
 

 

 

    

 

 

    

 

 

 

 

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Amounts related to pension and postretirement medical adjustments are reclassified to pension cost, which is allocated to cost of products sold and operating expenses based on salaries and wages, approximately as follows (in thousands):

 

  Thirteen Weeks Ended   Twenty-six Weeks Ended  
      June 26,    
2015
      June 27,    
2014
      June 26,    
2015
      June 27,    
2014
 

Cost of products sold

 $ 707     $ 440     $ 1,645     $ 876   

Product development

  319      195      702      382   

Selling, marketing and distribution

  529      354      1,232      689   

General and administrative

  364      236      778      466   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before tax

 $ 1,919     $ 1,225     $ 4,357     $ 2,413   

Income tax (benefit)

  (739)      (436)      (1,641)      (864)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total after tax

 $ 1,180     $ 789     $ 2,716     $ 1,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

On May 11, 2015, the Company entered into an accelerated share repurchase arrangement (“ASR”) with a financial institution. In exchange for an up-front payment of $60 million, the financial institution delivered 742,880 shares of Company common stock with a fair value of $54 million. The total number of shares ultimately delivered under the ASR is determined at the end of the purchase period (up to three months, but not less than one month) based on the volume weighted-average price (“VWAP”) of the Company’s common stock during that period. If there were no change in the market price of the Company’s stock during the purchase period, the Company would receive approximately 90,000 additional shares at the end of the purchase period.

The Company accounted for the up-front payment as a reduction of shareholders’ equity in the period made. Shares received under the ASR were retired and reflected as a reduction of outstanding shares on the date delivered for purposes of calculating earnings per share. The forward contract aspect of the ASR met all of the applicable criteria for equity classification, and therefore, was accounted for as a derivative indexed to the Company’s equity.

Subsequent to the end of the second quarter, the purchase period ended and the Company received an additional 94,515 shares to complete the ASR at an average realized price of $71.65 per share.

 

6. Beginning with the first quarter of 2015 the Company revised the presentation of its financial reporting segments. Operations of the Process and the Oil and Natural Gas divisions, historically included in the Industrial segment, are now aggregated with the Lubrication division (formerly reported as a separate segment) in the newly-formed Process segment. This change aligns the types of products offered and markets served within the segments. Prior year segment information has been restated to conform to 2015 reporting.

A summary of the Company’s three reportable segments (Industrial, Process and Contractor) follows.

The Industrial segment includes our Industrial Products and Applied Fluid Technologies divisions. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other fluids. Markets served

 

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include automotive and vehicle assembly and components production, wood and metal products, rail, marine, aerospace, farm, construction, bus, recreational vehicles, and various other industries.

The Process segment includes our Process, Oil and Natural Gas, and Lubrication divisions. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, waste water, petroleum, food, lubricants and other fluids. Markets served include food and beverage, dairy, oil and natural gas, pharmaceutical, cosmetics, electronics, waste water, mining, fast oil change facilities, service garages, fleet service centers, automobile dealerships and industrial lubrication applications.

The Contractor segment remains unchanged. The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture, and line striping.

Sales and operating earnings by segment were as follows (in thousands):

 

      Thirteen Weeks Ended           Twenty-six Weeks Ended      
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net Sales

Industrial

$ 153,502    $ 156,578    $ 296,768    $ 308,624   

Process

  71,946      54,850      139,627      107,860   

Contractor

  110,041      111,121      205,547      196,027   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 335,489    $ 322,549    $ 641,942    $ 612,511   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Earnings

Industrial

$ 50,738    $ 50,892    $ 93,678    $ 99,997   

Process

  13,988      13,572      24,486      26,215   

Contractor

  27,040      28,289      46,415      46,539   

Unallocated corporate (expense)

  (7,875)      (6,905)      (15,457)      (12,198)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 83,891    $ 85,848    $ 149,122    $ 160,553   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets by segment were as follows (in thousands):

 

      June 26,    
2015
      Dec 26,    
2014
   

    

Industrial

$ 567,759    $ 548,868   

Process

  499,113      304,903   

Contractor

  214,092      176,757   

Unallocated corporate

  137,944      514,250   
    

 

 

    

 

 

    

Total

$     1,418,908    $     1,544,778   
    

 

 

    

 

 

    

Unallocated corporate assets decreased due to the sale of the Liquid Finishing assets in the second quarter of 2015 (see note 12).

 

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Geographic information follows (in thousands):

 

         Thirteen Weeks Ended            Twenty-six Weeks Ended    
     June 26,
2015
     June 27,
2014
     June 26,
2015
     June 27,
2014
 

Net sales

(based on customer location)

           

United States

   $ 170,921       $ 156,160       $ 330,249       $ 290,082   

Other countries

     164,568         166,389         311,693         322,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 335,489       $ 322,549       $ 641,942       $ 612,511   
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 26,
2015
     Dec 26,
2014
        

Long-lived assets

        

United States

   $ 140,935       $ 131,131      

Other countries

     30,464         30,099      
  

 

 

    

 

 

    

Total

   $ 171,399       $ 161,230      
  

 

 

    

 

 

    

 

7. Major components of inventories were as follows (in thousands):

 

    June 26,
        2015        
     Dec 26,
        2014        
      

    

       

Finished products and components

  $ 108,684       $ 87,384      

Products and components in various stages of completion

    49,864         47,682      

Raw materials and purchased components

    82,105         69,212      
 

 

 

    

 

 

    
    240,653         204,278      

Reduction to LIFO cost

    (46,085)         (44,481)      
 

 

 

    

 

 

    

Total

  $ 194,568       $ 159,797      
 

 

 

    

 

 

    

 

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8. Information related to other intangible assets follows (dollars in thousands):

 

  Estimated
Life
(years)
      Cost         Accumulated
Amortization
  Foreign
Currency
  Translation  
  Book
      Value      
 

June 26, 2015

                 

Customer relationships

3 - 14  $ 197,823     $ (29,364)     $ (4,368)     $ 164,091   

Patents, proprietary technology and product documentation

3 - 11   20,499      (8,134)      (318)      12,047   

Trademarks, trade names and other

5   495      (91)      (42)      362   
     

 

 

    

 

 

    

 

 

    

 

 

 
  218,817      (37,589)      (4,728)      176,500   

Not Subject to Amortization:

Brand names

  69,165      -        (1,431)      67,734   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

 $ 287,982     $ (37,589)     $ (6,159)     $ 244,234   
     

 

 

    

 

 

    

 

 

    

 

 

 

December 26, 2014

                 

Customer relationships

3 - 14  $ 143,144     $ (21,948)     $ (7,334)     $ 113,862   

Patents, proprietary technology and product documentation

3 - 11   18,268      (7,126)      (655)      10,487   

Trademarks, trade names and other

5   175      (44)          131   
     

 

 

    

 

 

    

 

 

    

 

 

 
  161,587      (29,118)      (7,989)      124,480   

Not Subject to Amortization:

Brand names

  55,265          (3,467)      51,798   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

 $     216,852     $     (29,118)     $     (11,456)     $     176,278   
     

 

 

    

 

 

    

 

 

    

 

 

 

Amortization of intangibles for the quarter was $4.4 million in 2015 and $2.7 million in 2014 and for the year-to-date was $8.5 million in 2015 and $5.8 million in 2014. Estimated annual amortization expense is as follows: $17.4 million in 2015, $17.6 million in 2016, $17.3 million in 2017, $17.0 million in 2018, $16.9 million in 2019 and $98.8 million thereafter.

Changes in the carrying amount of goodwill in 2015 were as follows (in thousands):

 

      Industrial           Process           Contractor           Total      

Beginning balance

 $ 188,273     $ 91,569     $ 12,732     $ 292,574   

Additions from business acquisitions

  5,037      101,730      -        106,767   

Foreign currency translation

  2,846      1,342      -         4,188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

 $ 196,156     $   194,641     $ 12,732     $    403,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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9. Components of other current liabilities were (in thousands):

 

  June 26,
2015
  Dec 26, 2014    
         

Accrued self-insurance retentions

$ 7,371    $ 7,089   

Accrued warranty and service liabilities

  7,641      7,609   

Accrued trade promotions

  5,830      7,697   

Payable for employee stock purchases

  4,951      9,126   

Customer advances and deferred revenue

  15,763      8,918   

Income taxes payable

  48,104      5,997   

Other

  32,624      25,157   
  

 

 

    

 

 

    

Total other current liabilities

$      122,284    $         71,593   
  

 

 

    

 

 

    

A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues. Following is a summary of activity in accrued warranty and service liabilities (in thousands):

 

  Twenty-six
Weeks Ended
June 26,
        2015         
  Year Ended
Dec 26,
        2014        
   
         

Balance, beginning of year

 $ 7,609     $ 7,771   

Assumed in business acquisition

  -        12   

Charged to expense

  3,169      6,069   

Margin on parts sales reversed

  1,035      1,920   

Reductions for claims settled

  (4,172)      (8,163)   
  

 

 

    

 

 

    

Balance, end of period

 $         7,641     $          7,609   
  

 

 

    

 

 

    

 

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10. Assets and liabilities measured at fair value on a recurring basis and fair value measurement level were as follows (in thousands):

 

     Level    June 26,
      2015      
  Dec 26,
      2014      
 

Assets

Cash surrender value of life insurance

2  $ 13,597     $ 13,187   

Forward exchange contracts

2   -        280   
     

 

 

    

 

 

 

Total assets at fair value

 $ 13,597     $ 13,467   
     

 

 

    

 

 

 

Liabilities

Contingent consideration

3  $ 8,100     $ -     

Deferred compensation

2   3,205      2,676   

Forward exchange contracts

2   62      -     
     

 

 

    

 

 

 

Total liabilities at fair value

 $ 11,367     $ 2,676   
     

 

 

    

 

 

 

Contracts insuring the lives of certain employees who are eligible to participate in certain non-qualified pension and deferred compensation plans are held in trust. Cash surrender value of the contracts is based on performance measurement funds that shadow the deferral investment allocations made by participants in certain deferred compensation plans. The deferred compensation liability balances are valued based on amounts allocated by participants to the underlying performance measurement funds.

Contingent consideration liability represents the estimated value (using a market approach) of future payments to be made to previous owners of an acquired business (see Note 11).

Long-term notes payable with fixed interest rates have a carrying amount of $300 million and an estimated fair value of $330 million as of June 26, 2015 and $330 million as of December 26, 2014. The fair value of variable rate borrowings approximates carrying value. The Company uses significant other observable inputs to estimate fair value (level 2 of the fair value hierarchy) based on the present value of future cash flows and rates that would be available for issuance of debt with similar terms and remaining maturities.

 

11. On January 20, 2015, the Company completed the acquisition of High Pressure Equipment Holdings, LLC (HiP) for $160 million cash. HiP designs and manufactures valves, fittings and other flow control equipment engineered to perform in ultra-high pressure environments. HiP’s products and business relationships will enhance Graco’s position in the oil and natural gas industry and complement Graco’s core competencies of designing and manufacturing advanced flow control technologies. HiP had sales of $38 million in 2014. Results of HiP operations, including $15 million of sales, have been included in the Company’s Process segment from the date of acquisition.

 

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Purchase consideration was allocated to assets acquired and liabilities assumed based on estimated fair values as follows (in thousands):

 

       

Cash and cash equivalents

 $ 1,904   

Accounts receivable

  4,714   

Inventories

  7,605   

Other current assets

  69   

Property, plant and equipment

  1,962   

Deferred income taxes

  1,840   

Identifiable intangible assets

  60,100   

Goodwill

  86,149   
  

 

 

    

Total assets acquired

  164,343   

Liabilities assumed

  (3,414)   
  

 

 

    

Net assets acquired

 $      160,929   
  

 

 

    

Post-closing working capital adjustments that completed the HIP purchase price allocation resulted in a $0.5 million reduction of goodwill in the second quarter of 2015.

Identifiable intangible assets and estimated useful life are as follows (dollars in thousands):

 

     

Estimated
 Life (years) 

 

Customer relationships

  47,100    12

Trade names

  13,000    Indefinite
  

 

 

       

Total identifiable intangible assets

$          60,100   
  

 

 

       

Approximately two-thirds of the goodwill acquired with HiP is deductible for tax purposes.

On January 2, 2015 the Company acquired White Knight Fluid Handling for $16 million cash and a commitment for additional consideration if future revenues exceed certain thresholds, valued at $8 million. The maximum payout is not limited. White Knight designs and manufactures high purity, metal-free pumps used in the production process of manufacturing semiconductors, solar panels, LED flat panel displays and various other electronics. The products, brands and distribution channels of White Knight expand and complement the offerings of the Company’s Process segment. The purchase price was allocated based on estimated fair values, including $12 million of goodwill, $9 million of other identifiable intangible assets and $3 million of net tangible assets.

Post-closing working capital adjustments that completed the Alco purchase price allocation, acquired in the fourth quarter of 2014, resulted in a $4 million addition to goodwill in the first quarter of 2015.

The Company completed other acquisitions in 2015 that were not material to the consolidated financial statements.

 

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12. In April 2015, the Company sold the Liquid Finishing assets acquired in 2012 that were held as a cost-method investment. Selling price was $590 million cash, subject to customary post-closing adjustments. The $147 million pre-tax gain on the sale, net of transaction and other related expenses, was included in investment income in the Company’s consolidated statements of earnings. Prior to the sale, income was recognized on dividends received from after-tax earnings of Liquid Finishing and also included in investment income. Dividend income for the quarter totaled $12 million in 2015 and $11 million in 2014. Year-to-date dividend income was $42 million in 2015 and $15 million in 2014.

 

13. The effective income tax rate was 28 percent for the quarter, consistent with the comparable period last year, and 26 percent for the year-to-date, down 3 percentage points compared to last year. In the second quarter, the Company asserted that it will indefinitely reinvest earnings of foreign subsidiaries to support expansion of its international business. The change in assertion decreased deferred income taxes related to undistributed foreign earnings by $7 million and reduced the effective tax rate compared to last year. The tax rate effects of the gain on the sale of the Liquid Finishing assets offset the effects of the foreign earnings reinvestment assertion. Higher post-tax dividend income and an additional non-recurring tax benefit of $2 million further reduced the year-to-date effective tax rate.

 

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Item 2.

GRACO INC. AND SUBSIDIARIES

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company designs, manufactures and markets systems and equipment to move, measure, control, dispense and spray fluid and coating materials. Management classifies the Company’s business into three reportable segments: Industrial, Process and Contractor. Key strategies include developing and marketing new products, expanding distribution globally, opening new markets with technology and channel expansion and completing strategic acquisitions.

The following Management’s Discussion and Analysis reviews significant factors affecting the Company’s results of operations and financial condition. This discussion should be read in conjunction with the financial statements and the accompanying notes to the financial statements.

Consolidated Results

Net sales, net earnings and earnings per share were as follows (in millions except per share amounts and percentages):

 

        Thirteen Weeks Ended                 Twenty-six Weeks Ended           
  June 26,
2015
  June 27,
2014
  %
 Change 
  June 26,
2015
  June 27,
2014
  %
 Change 
 

Net Sales

$     335.5    $     322.5      4%    $     641.9    $     612.5      5%   

Operating Earnings

$ 83.9    $ 85.8      (2)%    $ 149.1    $ 160.6      (7)%   

Net Earnings

$ 172.6    $ 66.2      161%    $ 241.5    $ 117.0      106%   

Diluted Net Earnings per Common Share

$ 2.90    $ 1.07      171%    $ 4.02    $ 1.88      114%   

In April 2015, the Company sold the Liquid Finishing business assets acquired in 2012. Held separate investment income includes the net gain on sale of $147 million and dividends of $12 million for the quarter and $42 million year-to-date. Net earnings include after-tax net gain on the sale and dividend income totaling $110 million ($1.85 per diluted share) for the quarter and $139 million ($2.32 per diluted share) for the year-to-date. Net earnings in 2014 included after-tax net investment income of $11 million ($0.18 per diluted share) for the quarter and $15 million ($0.23 per diluted share) for the year-to-date. No further Liquid Finishing dividends will be received.

Results excluding Liquid Finishing investment income and expense are a better measure of the Company’s on-going operations and provide a more consistent base of comparison to future results. A calculation of the non-GAAP measurement of net earnings excluding investment income and expense follows (in millions except per share amounts):

 

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      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net Earnings, as reported

$ 172.6    $ 66.2    $ 241.5    $ 117.0   

Held separate investment (income), net

  (158.8)      (10.6)      (188.4)      (14.2)   

Income tax effect

  49.1      (0.2)      48.9      (0.3)   
  

 

 

    

 

 

      

 

 

    

 

 

 

Net Earnings, adjusted

$ 62.9    $ 55.4    $ 102.0    $ 102.5   
  

 

 

    

 

 

      

 

 

    

 

 

 

Diluted earnings per share

As reported

$ 2.90    $ 1.07    $ 4.02    $ 1.88   

Adjusted

  1.05      0.89      1.70      1.65   

The following table presents components of changes in sales:

 

  Quarter  
  Segment   Region      
    Industrial       Process       Contractor       Americas       EMEA       Asia Pacific         Total      

Volume and Price

  3  %       4  %       3  %       3  %       1  %       5  %       3  %    

Acquisitions

  1  %       32  %       -    %       5  %       9  %       8  %       6  %    

Currency

  (6) %       (5) %       (4) %       (1) %       (15) %       (5) %       (5) %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  (2) %       31  %       (1) %       7  %       (5) %       8  %       4  %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  Year-to-Date  
  Segment   Region      
  Industrial   Process   Contractor   Americas   EMEA   Asia Pacific       Total      

Volume and Price

  1  %       4  %       9  %       7  %       -    %       (2) %       4  %    

Acquisitions

  1  %       30  %       -    %       5  %       9  %       6  %       6  %    

Currency

  (6) %       (5) %       (4) %       (1) %       (15) %       (4) %       (5) %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  (4) %       29  %       5  %       11  %       (6) %       -    %       5  %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sales by geographic area were as follows (in millions):

 

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015 
  June 27,
2014 
  June 26,
2015 
  June 27,
2014 
 

Americas1

$     197.3    $     184.8    $     382.1    $     343.6   

EMEA2

  75.6      79.7      144.4      153.1   

Asia Pacific

  62.6      58.0      115.4      115.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

$ 335.5    $ 322.5    $ 641.9    $ 612.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

1 North and South America, including the U.S.

2 Europe, Middle East and Africa

 

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Changes in currency translation rates reduced sales and net earnings by approximately $17 million and $6 million, respectively, for the quarter and $30 million and $10 million, respectively for the year-to-date.

Sales for the quarter increased 4 percent, with increases in the Americas and Asia Pacific partially offset by a decrease in EMEA. Sales from operations acquired in the fourth quarter of 2014 and the first half of 2015 totaled $19 million for the quarter, contributing 6 percentage points of growth. Organic sales at consistent translation rates increased 3 percent, with increases of 3 percent in the Americas, 1 percent in EMEA and 5 percent in Asia Pacific.

Year-to-date sales increased 5 percent, with a double digit percentage increase in the Americas partially offset by decreases in EMEA and Asia Pacific. Sales from acquired operations totaled $34 million, contributing 6 percentage points of growth. Organic sales at consistent translation rates increased 4 percent, including a 7 percent increase in the Americas, a slight increase in EMEA and a 2 percent decrease in Asia Pacific.

Gross profit margin rates for the quarter and year-to-date were lower than rates in the comparable periods last year due mostly to changes in currency translation rates. Lower average gross margin rates of acquired operations (including purchase accounting effects) decreased overall gross margin rates by approximately one-half percentage point for both the quarter and the year-to-date.

Total operating expenses for the quarter were $6 million (6 percent) higher than the second quarter last year. Year-to-date operating expenses were $18 million (10 percent) higher than last year. The increases included expenses of acquired operations totaling $7 million for the quarter and $13 million for the year-to-date. Spending related to regional and product expansion initiatives increased year-to-date expenses by approximately $3 million. Unallocated corporate expenses increased $1 million for the quarter and $3 million year-to-date, mostly from increases in pension, stock compensation and new central warehouse.

The effective income tax rate was 28 percent for the quarter, consistent with the comparable period last year, and 26 percent for the year-to-date, down 3 percentage points compared to last year. In the second quarter, the Company asserted that it will indefinitely reinvest earnings of foreign subsidiaries to support expansion of its international business. The change in assertion decreased deferred income taxes related to undistributed foreign earnings by $7 million and reduced the effective tax rate compared to last year. The tax rate effects of the gain on the sale of the Liquid Finishing assets offset the effects of the foreign earnings reinvestment assertion. Higher post-tax dividend income and an additional non-recurring tax benefit of $2 million further reduced the year-to-date effective tax rate.

 

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Table of Contents

Segment Results

Certain measurements of segment operations compared to last year are summarized below:

 

Industrial

 

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net sales (in millions)

Americas

$ 71.6    $ 69.4    $ 139.3    $ 135.1   

EMEA

  41.4      49.4      82.4      97.0   

Asia Pacific

  40.5      37.8      75.1      76.5   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

$ 153.5    $ 156.6    $ 296.8    $ 308.6   
  

 

 

    

 

 

      

 

 

    

 

 

 

Operating earnings as a percentage of net sales

  33 %      33 %      32 %      32 %   
  

 

 

    

 

 

      

 

 

    

 

 

 

Industrial segment sales for the quarter decreased 2 percent, but increased 4 percent at consistent translation rates. Sales in this segment increased 3 percent in the Americas, decreased 16 percent in EMEA (2 percent at consistent translation rates) and increased 7 percent in Asia Pacific (12 percent at consistent translation rates). Year-to-date sales decreased 4 percent, but increased 2 percent at consistent translation rates. Sales increased 3 percent in the Americas, decreased 15 percent in EMEA (1 percent at consistent translation rates) and decreased 2 percent in Asia Pacific (increased 2 percent at consistent translation rates). Operating margin rates for the Industrial segment for the quarter and year-to-date were consistent with last year.

Process

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net sales (in millions)

Americas

$ 44.4    $ 36.3    $ 87.3    $ 70.8   

EMEA

  14.9      9.0      28.8      18.4   

Asia Pacific

  12.6      9.6      23.5      18.7   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

$ 71.9    $ 54.9    $ 139.6    $ 107.9   
  

 

 

    

 

 

      

 

 

    

 

 

 

Operating earnings as a percentage of net sales

  19 %      25 %      18 %      24 %   
  

 

 

    

 

 

      

 

 

    

 

 

 

Process segment sales for the quarter increased 31 percent (36 percent at consistent translation rates), including double-digit percentage increases in all regions. Year-to-date sales in this segment increased 29 percent (34 percent at consistent translation rates). Most of the sales increases were from acquired operations including Alco Valves (acquired fourth quarter of 2014), White Knight Fluid Handling and High Pressure Equipment (both acquired in January 2015). Organic sales growth at consistent translation rates was 4 percent for both the quarter and the year-to-date. Lower average profit margins of acquired operations, changes in currency translation rates and incremental investment in oil and natural gas products led to decreases in operating margin rates for this segment.

 

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Contractor

      Thirteen Weeks Ended         Twenty-six Weeks Ended    
  June 26,
2015
  June 27,
2014
  June 26,
2015
  June 27,
2014
 

Net sales (in millions)

Americas

$ 81.3    $ 79.2    $ 155.5    $ 137.7   

EMEA

  19.3      21.3      33.2      37.7   

Asia Pacific

  9.4      10.6      16.8      20.6   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

$ 110.0    $ 111.1    $ 205.5    $ 196.0   
  

 

 

    

 

 

      

 

 

    

 

 

 

 

Operating earnings as a percentage of net sales

  25 %      25 %      23 %      24 %   
  

 

 

    

 

 

      

 

 

    

 

 

 

Contractor segment sales for the quarter decreased 1 percent, but increased 3 percent at consistent translation rates, mostly in the Americas. Year-to-date sales in this segment increased 5 percent (9 percent at consistent translation rates). Sales increased 13 percent in the Americas, decreased 12 percent in EMEA (but increased 2 percent at consistent translation rates) and decreased 18 percent in Asia Pacific (15 percent at consistent translation rates). Operating margin rate for the quarter was consistent with the comparable period last year. Year-to-date operating margin rate decreased by one percentage point, mostly due to changes in currency translation rates and additional marketing spending, including new product launch costs and other volume-related increases.

Liquidity and Capital Resources

Net cash provided by operating activities was $97 million in 2015, a $13 million increase over the comparable period of 2014. Accounts receivable and inventory balances increased since the end of 2014 due to acquisitions, increases in business activity and inventory increases to improve customer service levels. Proceeds of $590 million from the sale of Liquid Finishing assets were principally used to retire debt. Other significant uses of cash in the first half of 2015 included business acquisitions totaling $188 million, purchases of Company common stock of $131 million and dividend payments to shareholders of $35 million.

In January 2015, the Company completed the acquisition of High Pressure Equipment Holdings, LLC (HiP) for $160 million. HiP designs and manufactures valves, fittings and other flow control equipment engineered to perform in ultra-high pressure environments. The Company also acquired White Knight Fluid Handling, a manufacturer of high purity, metal-free pumps used in the production process of manufacturing semiconductors, solar panels, LED flat panel displays and various other electronics. The Company completed other acquisitions in the second quarter that were not material to the consolidated financial statements.

At June 26, 2015, the Company had various lines of credit totaling $549 million, of which $539 million was unused. Internally generated funds and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2015.

 

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Outlook

The Company continues to target mid-single-digit organic sales growth, on a constant currency basis, and growth in all reportable segments and regions for the full-year 2015. The Americas remains our strongest performing region and we are optimistic Contractor Americas will perform in the second half. Currency uncertainty and geopolitical instability continue to generate volatility and present challenges for EMEA and Asia Pacific growth. At current exchange rates, unfavorable changes in foreign currency translation rates create a full-year headwind of approximately 5 percent on sales and 11 percent on earnings in 2015.

SAFE HARBOR CAUTIONARY STATEMENT

The Company desires to take advantage of the “safe harbor” provisions regarding forward-looking statements of the Private Securities Litigation Reform Act of 1995 and is filing this Cautionary Statement in order to do so. From time to time various forms filed by our Company with the Securities and Exchange Commission, including this Form 10-Q and our Form 10-K and Form 8-Ks, and other disclosures, including our 2014 Overview report, press releases, earnings releases, analyst briefings, conference calls and other written documents or oral statements released by our Company, may contain forward-looking statements. Forward-looking statements generally use words such as “expect,” “foresee,” “anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and similar expressions, and reflect our Company’s expectations concerning the future. All forecasts and projections are forward-looking statements. Forward-looking statements are based upon currently available information, but various risks and uncertainties may cause our Company’s actual results to differ materially from those expressed in these statements. The Company undertakes no obligation to update these statements in light of new information or future events.

Future results could differ materially from those expressed, due to the impact of changes in various factors. These risk factors include, but are not limited to: our Company’s growth strategies, which include making acquisitions, investing in new products, expanding geographically and targeting new industries; economic conditions in the United States and other major world economies; changes in currency translation rates; changes in laws and regulations; compliance with anti-corruption laws; new entrants who copy our products or infringe on our intellectual property; risks incident to conducting business internationally; the ability to meet our customers’ needs and changes in product demand; supply interruptions or delays; security breaches; political instability; results of and costs associated with, litigation, administrative proceedings and regulatory reviews incident to our business as well as indemnification claims under our asset purchase agreement with Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc., and Finishing Brands Holdings Inc.; the possibility of decline in purchases from few large customers of the Contractor segment; variations in activity in the construction and automotive industries; and natural disasters. Please refer to Item 1A of our Annual Report on Form 10-K for fiscal year 2014 for a more comprehensive discussion of these and other risk factors. These reports are available on the Company’s website at www.graco.com and the Securities and Exchange Commission’s website at www.sec.gov. Shareholders, potential investors and other readers are urged to consider these factors in evaluating forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above and in Item 1A might prove important to the Company’s future results. It is not possible for management to identify each and every factor that may have an impact on the Company’s operations in the future as new factors can develop from time to time.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes related to market risk from the disclosures made in the Company’s 2014 Annual Report on Form 10-K.

 

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Executive Officer, the Chief Financial Officer, the Vice President, Controller and Information Systems, and the Vice President, General Counsel and Secretary. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures are effective.

Changes in internal controls

During the quarter, there was no change in the Company’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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Table of Contents
PART II OTHER INFORMATION

 

Item 1A. Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s 2014 Annual Report on Form 10-K, except for the changes disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 27, 2015 and except for the update to the “Legal Proceedings” risk factor as follows:

Legal Proceedings – Costs associated with claims, litigation, administrative proceedings and regulatory reviews, and potentially adverse outcomes, may affect our profitability.

As our Company grows, we are at an increased risk of being a target in litigation, administrative proceedings and regulatory reviews. We also may be exposed to litigation, claims for indemnification or other claims relating to acquisitions or the divestiture of the liquid finishing business assets under the asset purchase agreement with Carlisle Companies Incorporated, Carlisle Fluid Technologies, Inc., and Finishing Brands Holdings Inc. The cost of defending such matters appears to be increasing, particularly in the United States. We may also need to pursue claims or litigation to protect our interests. Such costs may adversely affect our Company’s profitability. Our businesses expose us to potential toxic tort, product liability and commercial claims. Successful claims against the Company may adversely affect our results.

 

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Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On September 14, 2012, the Board of Directors authorized the Company to purchase up to 6,000,000 shares of its outstanding common stock, primarily through open-market transactions. The authorization expires on September 30, 2015. On April 24, 2015, the Board of Directors authorized the purchase of up to an additional 6,000,000 shares over an indefinite period of time or until terminated by the Board.

In addition to shares purchased under the Board authorizations, the Company purchases shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price or tax due upon exercise of options or vesting of restricted stock.

Information on issuer purchases of equity securities follows:

 

Period

Total
Number
of Shares
  Purchased  
       Average     
Price
Paid per
Share
  Total
Number
of Shares
Purchased
as Part of
Publicly
  Announced  
Plans or
Programs
  Maximum
Number of
Shares that
  May Yet Be  
Purchased
Under the
Plans or
Programs
(at end of
period)
 

Mar 28, 2015 – Apr 24, 2015

  190,000   $ 71.68     190,000     7,647,377  

Apr 25, 2015 – May 22, 2015

  110,000   $ 72.27     110,000     7,537,377  

May 2015 ASR (1)

  742,880     (1)      742,880     6,794,497  

May 23, 2015 – Jun 26, 2015

  -     $ -       -       6,794,497  

 

(1) On May 11, 2015, the Company entered into an accelerated share repurchase arrangement (“ASR”) with a financial institution. In exchange for an up-front payment of $60 million, the financial institution delivered 742,880 shares of Company common stock with a fair value of $54 million. The total number of shares ultimately delivered and the average price per share will be determined at the end of the purchase period (up to three months, but not less than one month) based on the volume weighted-average price of the Company’s common stock during that period. Subsequent to the end of the second quarter, the purchase period ended and the Company received an additional 94,515 shares to complete the ASR at an average realized price of $71.65 per share.

 

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Item 6.   Exhibits

 

  3.1    Restated Articles of Incorporation as amended June 13, 2014. (Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed June 16, 2014.)
  3.2    Restated Bylaws as amended February 14, 2014. (Incorporated by reference to Exhibit 3.2 to the Company’s 2013 Annual Report on Form 10-K.)
  10.1    Graco Inc. 2015 Stock Incentive Plan. (Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed March 11, 2015.)
  31.1    Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a).
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
  32    Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Title 18, U.S.C.
        99.1    Press Release Reporting First Quarter Earnings dated July 22, 2015.
  101    Interactive Data File.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 GRACO INC.
Date:

  July 22, 2015

By:

    /s/ Patrick J. McHale

    Patrick J. McHale
    President and Chief Executive Officer
    (Principal Executive Officer)
Date:

  July 22, 2015

By:

    /s/ James A. Graner

    James A. Graner
    Chief Financial Officer
    (Principal Financial Officer)
Date:

  July 22, 2015

By:

    /s/ Caroline M. Chambers

    Caroline M. Chambers

    Vice President, Corporate Controller

and Information Systems

    (Principal Accounting Officer)